The Board of Sirius Minerals plc (LON: SXX) has today announced changes to its financing and development plan and a comprehensive review of the various strategic options available to the Company to maximise value for its shareholders. Further to this the company has published unaudited half year results for Sirius and its subsidiaries for the six-month period ended 30th June 2019.
Financing and development update
- Company does not believe the proposed US$500 million senior secured notes offering can be issued in the current market conditions
- Scope of construction activities on the Company’s North Yorkshire Polyhalite Project will now be adjusted while a strategic review is undertaken over a period of up to 6 months
- Unrestricted cash reserves of £180m (£117m uncommitted) as at 31 August 2019 – provides sufficient liquidity for the Company to explore all strategic options during the strategic review
- US$400 million convertible bonds due 2027 (ISIN: XS1991116127), with the proceeds held in escrow following the issuance of such bonds in May 2019, will be redeemed and proceeds returned to investors
Chris Fraser, Managing Director and CEO of Sirius Minerals, commented:
“Due to the ongoing poor bond market conditions for an issuer like Sirius we have not been able to deliver our stage 2 financing plan. As a result, we have taken the decision to reduce the rate of development across the Project in order to preserve funding to allow more time to develop alternatives and preserve the significant amount of inherent value in this world-class project.
“The Company will now conduct a comprehensive strategic review over the next six months to assess and incorporate optimisations to the project development plan and to develop a different financing structure for the funds required. This is the most prudent decision to give the Company the time necessary to restructure its plans to move the Project forward. The process will incorporate feedback from prospective credit providers around the risks associated with construction and will include seeking a major strategic partner for the Project.”
Current financing plan
On 29 April 2019 the Company entered into commitment documents in respect of a US$2.5bn Revolving Credit Facility to be entered into in respect of its proposed stage 2 financing (the “RCF Commitment”). One of the conditions of the RCF Commitment, was the issuance of senior secured notes in a minimum amount of US$500 million and meeting certain criteria by no later than 29 October 2019.
On 6 August 2019 the Company announced that it had postponed the proposed note issuance due to market conditions. Since that time there has been no material change for an issuer like Sirius and the Company is not aware that any significant new issuer in the same B/B- credit range that has come to market.
To meet the terms of the RCF Commitment the note issuance must, as well as other conditions, be both broadly distributed and have an all-in effective yield not exceeding 15%. The Company has received feedback from a number of potential investors which has indicated that a note issuance could potentially be successful should the offering include warrants (the rights to ordinary shares in Sirius). However, a note with warrants attached would not satisfy the conditions set out in the RCF Commitment due to the expected returns of the warrant component of the offering. The Company requested, but did not obtain, a waiver of this condition to enable it to issue warrants as part of the note offering.
The Company intends to terminate the RCF Commitment in the coming days.
Government support
Due to the lack of depth in the commercial bank project finance market the Company developed its original stage 2 financing plan for its North Yorkshire Polyhalite Project (the “Project”) based on the anticipated participation of the Infrastructure and Projects Authority (“IPA”) which is part of HM Treasury. Discussions with the IPA were paused in early 2019 to allow the Company to pursue the RCF based financing plan as per the RCF Commitment.
Following the postponement of the proposed senior secure notes offering in August, the Company re-engaged with the UK Government. The Company had requested Government provide a commitment to enable the issue of up to US$1bn of guaranteed bonds in the event the Company was unable to issue unguaranteed bonds to refinance the RCF (after approximately at least a further 18 months of development activity and up to an additional US$2bn being invested in the Project). The Government has reviewed the case for the provision of the support requested to facilitate the financing of the Project and has decided not to provide the support requested. The Company believed this commitment would have enabled the Company’s financing to be delivered as planned.
Escrow Bonds
As part of its proposed stage 2 financing, and as previously announced, on 23 May 2019 Sirius Minerals Finance No.2 Limited (the “Convertible Bond Issuer”) issued US$400 million convertible bonds due 2027 (ISIN: XS1991116127) (the “Escrow Bonds”) guaranteed by the Company, the gross proceeds of which were placed in escrow and (other than in the limited circumstances described in the terms and conditions of the Escrow Bonds) only to be released to the Convertible Bond Issuer upon the earlier of (a) 23 January 2020 and (b) the completion (a “Stage 2 Debt Event”) by the Company and/or a subsidiary of the Company of (i) an issuance of senior secured guaranteed bonds or other financing raising gross proceeds received by the Company or such subsidiary in an amount of at least US$500 million and (ii) the entry into a revolving credit facility with a committed amount available to the Company or one of its subsidiaries of at least US$2.5bn from time to time and provided that, on the date such Stage 2 Debt Event is notified to holders of the Escrow Bonds, the Company or the relevant subsidiary is in compliance with its covenants under such facility.
For the reasons set out above, the Company and its subsidiaries will not proceed with (a) an issuance of senior secured guaranteed bonds or other financing raising gross proceeds received by the Company or such subsidiary in an amount of at least US$500 million or (b) the entry into a revolving credit facility with a committed amount available to the Company or one of its subsidiaries of at least US$2.5bn from time to time. Accordingly, a “Stage 2 Debt Non-Occurrence Event” under the terms and conditions of the Escrow Bonds has occurred.
As a result, the Escrow Bonds shall be automatically redeemed pursuant to their terms and conditions, subject to the right of any holder of Escrow Bonds to elect that its Escrow Bonds shall not be redeemed. In connection with such redemption, an amount equal to the aggregate principal amount of the relevant Escrow Bonds so redeemed shall be released from escrow to the principal paying agent for onward payment by way of part payment of the redemption monies in respect of such Escrow Bonds to the holders of the Escrow Bond so redeemed.
Following completion of such redemption (and subject to any holder of the Escrow Bonds making the election referred to in the previous paragraph), approximately US$240 million of convertible bonds guaranteed by the Company will remain outstanding.
Strategic review
As at 31 August 2019 the Company had approximately £180 million of unrestricted cash which included over £117 million of uncommitted capital. This amount does not provide sufficient liquidity for the Company to continue development of the Project in line with the Company’s publicly articulated development schedule for any significant period of time. As such the Board has decided that the scope of development works on the Project will now be adjusted to enable the Company to undertake a strategic review of its project development and financing options.
The Board considers that a reduced pace of development focused on key areas of the project that will ultimately serve to preserve the most value for the project and will provide the Company with a period of up to six months to review all available options for the Company to move forward. Under the terms of the Company’s major construction contracts the Company has the right to alter, increase, decrease or omit or otherwise amend the works for various periods of time. The Company expects to meet its payment obligations as they fall due during the period of the strategic review.
Potential to optimise the project development plan
A range of optimisation opportunities and acceleration initiatives have been developed by Sirius and its contractors over the last year. These include:
· Optimised Shaft Boring Roadheader (“SBR”) operation and scheduling – maximising the benefits of the upgrades built into the SBR’s purchased by the Company (targeting up to 4 meters per day long-run sinking average);
· Opportunity to remove the need for a tunnel boring machine (“TBM”) from Lockwood Beck (TBM2) from the development schedule due to the faster than expected tunnelling rates experienced on Drive 1, enabling Drive 1 to continue past Lockwood Beck and connect with Drive 3 from the Woodsmith Mine;
· Opportunity to utilise the TBM mucking system during the fitout of the mineral transport system (“MTS”) to transport up to 6 Mtpa of polyhalite to Teesside – potentially accelerating commercial production earlier than planned; and
· Resizing of key components and pilot plant testing increasing the MHF capacity and significantly reducing the cost of expansion to 13 Mtpa.
To be incorporated into the revised financing plan each of these initiatives need to be further developed and engineered and reviewed by the independent technical engineer to the Project. As part of the strategic review process the Company intends to enter into discussions with its contractors to ascertain how these optimisations can be fully incorporated into the development plan and how the savings and benefits will be shared between the contractors and Sirius.
Potential to revise the project development plan
In the debt raising processes conducted by the Company over the last three years, one common aspect identified by prospective credit providers has been the perceived risk associated with deep shaft construction. This perception and its weighting in underlying risk assessment is despite the unique circumstances of the Project and the technical due diligence completed by independent experts confirming the Company’s assessment of technical, cost and schedule risk associated with the development of the Project.
During the strategic review the Company will explore how the development of the shafts and the other major aspects of the construction programme can be rescheduled in a way that reduces this perceived risk and delivers better cost and scheduling certainty for debt providers across the project.
Alternative financing arrangements
The Company also intends to explore alternative financing structures. While the current stage 2 financing process has been unable to be completed at this time, a number of different investors and advisers have indicated the potential for a range of alternative approaches. These alternatives will now be assessed in detail to determine if there is a way to structure the financing of the development of the Project to enable either the existing development plan or a revised development plan to be financed through different means. The Company believes that the compelling economics of the Project provide a strong basis for a revised financing plan but this will require time to bring together the components of such a plan and to assess investor appetite for a revised financing plan.
Strategic investor process
The Company has identified strategic partners previously as a way to bring capital into the project and to provide additional support to the credit case. With the current delay to the stage 2 financing of the Project the Company intends to now undertake a much broader process with the possibility of the acquisition of a significant part of the Project.
Half year results for the period ended 30 June 2019
Business review
- Significant progress made across all construction sites and construction activities to date have progressed in line with 2019 full year guidance
- 10-year supply and distribution agreement with BayWa Agri Supply and Trade B.V. for up to 2.5 Mtpa POLY4 in Europe
- Major 8-year take-or-pay supply agreement with IFFCO for the supply of up to 1 Mtpa POLY4 in India
Financial review
- Operating loss for the period was £14.3m compared to £10.8m in the prior corresponding period, the increase primarily driven by a greater level of corporate and sales and marketing costs linked to the Company’s Stage 2 Financing.
- Loss for the financial period of £3.1m compared to a loss of £95.3m for the prior corresponding period, the reduction primarily driven by fair value gains attributable to derivative instruments in comparison to the fair losses incurred on these in the prior period.
- £240m deployed during the period for the purposes of developing the Project.
- Total funds at the end of June 2019 were £713.8m, comprising cash and cash equivalents of £349.0m and restricted cash of £364.8m and has reduced to $180m (£100m uncommitted) as at 31 August 2019.
BUSINESS REVIEW
Safety
The safety of employees and contractors remains a priority for the Group and is paramount to the success of our business. The Project’s Lost Time Injury Frequency Rate (“LTIFR”) as at 30 June 2019 stands at 2.18 which compares to a LTIFR of 3.54 at 31 December 2018. The LTIFR is a measure of lost time incidents per million man-hours on a twelve-month rolling average basis. The Company works closely with its employees and contractors to continually improve safety at all locations.
Construction progress
Construction has progressed in line with 2019 milestones at each of the Company’s construction sites during the period.
Service and production shafts
Service shaft works have progressed in line with schedule during the period. Excavation of the main-shaft has reached its target depth of 118m using conventional excavation techniques. Construction of the main shaft to depths exceeding 118 metres will be excavated using the shaft boring roadheader. The components of the shaft boring roadheader started to arrive at the Woodsmith Mine site in August this year and pre-assembly on surface has commenced.
In the service shaft foreshaft, preparatory works to enable the construction of the shaft boring roadheader headframe, the structure from which the shaft boring roadheader will be suspended during shaft construction, are now substantially complete.
All major components of the permanent winder for the service shaft are now in place. The temporary winders, which connect to the SBR during shaft construction to the mining level, have also progressed in line with schedule.
The excavation of the production shaft foreshaft has progressed faster than expected and is expected to reach its target depth of 45 metres in the coming days. The lessons learned from the excavation of the service shaft foreshaft have seen a significant increase in excavation efficiency in the production shaft. The production shaft differs from the service shaft in that it already has diaphragm walls installed to a depth of 120 metres in the main shaft and because of this excavation can occur at a faster rate than seen in the service shaft. In parallel with excavation of the production shaft, construction of the permanent winder building has progressed on schedule.
Mineral Transport System
MTS Drive 1 – Wilton to Lockwood Beck
MTS drive 1 tunnel construction has advanced ahead of expectations. Our first tunnel boring machine (“TBM”) “Stella Rose” has completed 1208 metres of tunnelling and is now over two months ahead of schedule. Stella Rose has now cleared the Wilton International site boundary, has successfully passed under all the neighbouring industrial infrastructure and is driving towards Lockwood Beck with advance rates that are better than expected. The TBM is now averaging 17m per 24 hours (including planned technical stops) and this is being achieved despite the relatively difficult shallow ground that only exists in the first 3,000m of the tunnel. The fastest advance rate achieved to date is 29.5 metres in 24 hours which exceeds our long run average advance rate assumptions for the construction of the MTS tunnel. The average advance rate is expected to increase as we exit the shallow ground and allow the machine to run at higher cutting speeds and with fewer interventions.
MTS Drive 2 – Lockwood Beck towards Woodsmith Mine
At Lockwood Beck, the intermediate access shaft has been successfully excavated and lined to 51 metres. A grouting process has commenced to prepare the ground ahead of commencement of the main shaft sink using the Galloway (the multi-level working platform that will be suspended near the shaft bottom during sinking and raised and lowered as required to allow conventional drill and blast sinking to continue to the final depth of the shaft). The temporary headframe is being erected and construction of the winder house has progressed on schedule.
MTS Drive 3 – Woodsmith Mine towards Lockwood Beck
Following the initial excavation to 115 metres of the MTS access shaft using the Herrenknecht vertical sinking machine (“VSM”), the Galloway has now been installed and is being prepared to begin conventional, drill and blast shaft excavation to the MTS level. To enable conventional shaft sinking operations to commence, the temporary headframe and winder building is being constructed on site and mechanical fit out is underway.
Materials Handling Facility
The mobilisation of Worley, our Materials Handling Facility (MHF) contract partner, has progressed well with offices and welfare facilities being established on site. Worley has completed the optimisation engineering phase of early works and the preparation works are underway ahead of the commencement of piling operations. Long lead procurement orders for certain key component parts of the MHF, including the granulators and dryers have been placed.
Construction of the full R&D demonstration facility at Wilton is well advanced with all key components now being assembled on site. The construction of the plant is expected to be completed in November, when it will be available for the production of demonstration granules.
Port Handling Facility
On 1 September 2019, the Company amended the existing design and build contract for the overland conveyor with PJ Carey Ltd, to include the scope of work for the Company’s port handling facility at Teesside (the “Port Handling Facilities”). The award of the Port Handling Facilities contract to PJ Carey Ltd has the benefit of removing a construction interface between the Port Handling Facilities and the overland conveyor works. The terms of the Port Handing Facilities contract, which is fixed price in nature, remain materially unchanged and in line with the Company’s cost estimates. On 31 August 2019, the Company took the decision to not to commence works under the previous engineering, procurement and construction contract for the development of the Port Handling Facilities, and this contract has now ended.
Sales & marketing
The Company has increased peak aggregate contracted sales volumes to 11.7 million tonnes per annum (“Mtpa”) during the period. In April, the Company announced it had signed a major European supply agreement with BayWa Agri Supply and Trade B.V. (“BayWa”), for volumes of POLY4 increasing to 2.5 Mtpa in year 10. BayWa is a leading European integrated agribusiness with an extensive commercial and logistical platform with direct access to the farmgate across Europe. In June, the Company announced it had signed a major take-or-pay supply agreement with Indian Farmers Fertilisers Cooperative Limited (“IFFCO”) for volumes of POLY4 increasing to one million tonnes per annum in year 8. IFFCO is one the largest co-operative societies in the world with access to more than 55 million Indian farmers.
To support the ongoing agronomy programme, the Company initiated 49 new agronomy trials during the period increasing the total number of trials to 430 on 48 crops in 30 different countries.
Stage 2 financing
On the 6 August 2019, the Company announced that it had decided to suspend the proposed offer by its wholly owned subsidiary of $500 million of senior secured notes due 2028, due to prevailing market conditions. The offer was to form part of the Group’s Stage 2 Financing.
The Company has today announced that, as a result of global market conditions, the ongoing uncertainty surrounding Brexit and the political environment in the United Kingdom, the Company and its advisors believe that a senior secured notes offering in compliance with the terms of the revolving credit facility commitment letter provided by JP Morgan Chase Bank N.A., London Branch (“J.P. Morgan”) is now unlikely to be achievable.
The Company has therefore today announced that the scope of construction activities on the project will now be adjusted while the Company undertakes a strategic review of its options.
The Board considers that a reduced pace of development focused on key areas of the project that will ultimately serve to preserve the most value for the project will provide the Company with a period of up to six months to review all available options for the Company to move forward. The Group will need to secure additional external financing in order to allow it to continue operations after 31 March 2020.
Further information can be found in the Company’s ‘Financing and development update’ announcement published today.
